Government Borrowing or Public Debt

Government borrowing refers to the process by which a government raises funds to finance its expenditures when its revenue, primarily from taxes, is insufficient to cover spending. It involves borrowing money from domestic or international sources, typically by issuing government securities (treasury bills for short-term, government bonds for long-term) or direct loans.

Reason for Government Borrowing

1. Budget Deficit: To bridge the gap between revenue and expenditure.

2. Public investments: To finance large-scale infrastructure.

3. Economic stimulus: To boost the economy during the recession by raising public spending.

4. Emerging Funding: To address urgent needs such as natural disasters like floods and earthquakes; pandemics like COVID-19; or military conflicts.

5. To Control Inflation: To reduce purchasing power, the government issues public loans.

Sources of Government Borrowing

1. Internal Borrowing: Debt is raised from within the country in domestic currency and it is voluntary and involuntary in nature. This concept started in 1930 during the Depression by J. M. Keynes. It is taken by the government from the central bank, commercial banks, financial institutions, non-banking financial institutions, and individuals.

2. External Borrowing: Debt is raised from foreign lenders, including commercial banks, governments, or international financial institutions. These loans, including their interest, must usually be paid in the currency in which the loan was taken. The main external debt sources are foreign governments (bilateral) and international financial institutions such as the ADB, WB, IMF, OPEC Fund, etc. (multilateral). They provide short-term loans for balance of payment (BOP) difficulties and long-term loans for development projects. A loan may be a soft loan with a low interest rate and a hard loan with a higher interest rate than the market interest rate.

In conclusion, it helps fund development projects, stimulates economic growth, and provides resources for public services. However, it can strain budgets, reduce private sector investment, and impact economic stability.